Product Governance—Lessons From The UK Model

What You Need To Know

• The Final Report of the Financial System Inquiry recommended that a targeted and principles-based product design and distribution obligation be introduced in Australia to strengthen product issuer and distributor accountability.
• This is consistent with the obligations which are already in place and well established in the UK and that will be rolled out across Europe as part of MiFID II.
• Due to the similarities with the UK regime, regulated institutions in Australia may wish to look to UK developments when implementing their own product governance framework.

What You Need To Do

• If you have any questions in relation to product governance please contact us.

FSI Recommendation

The Final Report of the Financial System Inquiry (FSI Report) recommended the introduction of a targeted and principles-based product design and distribution obligation in Australia, which places more of the onus for delivering consumer outcomes onto product manufacturers and distributors.

A new principles-based obligation on issuers and distributors would require them to consider both the type of consumers whose financial needs would be addressed by buying the relevant product (utilising, for example, stress testing and compliance testing) and the best distribution method for the relevant product. There would also be obligations on issuers and distributors to keep those matters under review following the launch of the relevant product.

The FCA model

The recommendations in the FSI Report reflects the product governance requirements that are already in place in the UK. In achieving its objective to halt customer detriment before it occurs, a key element of the UK Financial Conduct Authority's (FCA) focus is now on products and product governance.

The FCA has highlighted a lack of robustness in firms' product development and marketing processes which can increase the risk of poorly designed products and lead to mis-selling, or mis-buying by consumers.

Key Product Governance Requirements in The UK

The FCA has clearly set out its expectations of regulated firms in relation to product governance. In particular, the FCA has specified that firms (even those who just deliver the payout through a hedging arrangement, rather than those who truly design the product) should:

• identify the target audience and then design products that meet the target audience's needs, rather than merely contributing towards the firm’s bottom line;
• stress-test new products to ensure they are capable of delivering fair outcomes for the target audience;
• ensure a robust product approval process for new products and be clear about what is a 'new' product; and
• monitor the progress of a product through to the end of its life cycle.

Implications in Australia

Due to the similarities with the UK regime, regulated institutions in Australia may wish to look to UK developments when implementing their own product governance framework, in particular if the recommendations in the FSI Report in this area are taken forward.

It is also interesting to note that structured products were one of the first products to be on the FCA's watchlist in this area; they are rising in popularity in the UK and the FCA noted it was concerned that the growing number of structured product sales, as well as increasing product complexity, is placing a strain on firms' systems and controls. Accordingly this is one area "to watch" as ASIC develops its approach in relation to product governance.